How Proof-of-Work Blockchains Can Collaborate With Bitcoin To Enhance Security
Bitcoin is often criticized for the huge amount of energy it uses, but few would argue that it isn’t by far and away the most secure blockchain network of all. Its rock-solid security stems from its proof-of-work consensus algorithm, which utilizes a great deal of energy in order to disincentivize malicious activity.
Rival blockchains, such as Ethereum and Cosmos, use an alternative consensus mechanism known as proof-of-stake, which vastly reduces the amount of energy the network uses but does so at the cost of security.
It’s clear that both kinds of consensus mechanisms have to make a trade off, but what if it were possible to come up with a compromise, using aspects of both PoW and PoS? This is the main argument behind proposals for a hybrid PoW/PoS consensus mechanism that aims to mitigate the downsides and achieve all of the upsides - namely, strong security combined with lower energy usage.
Understanding Bitcoin’s Security Model
The PoW consensus mechanism was first proposed by Hal Finney in 2004, and requires network nodes to expend a significant amount of energy while competing to solve complex mathematical problems in order to win the right to mint the next “block” and earn mining rewards. Because the nodes have to pay for this energy, the model provides a strong incentive not to try and cheat.
Once all of the Bitcoin nodes have reached consensus on the next batch of transactions to be stored on chain (the next block), PoW ensures they act in good faith. In this way, network participants can have full confidence in Bitcoin without the need for any intermediaries.
PoW enables Bitcoin to act as an immutable and secure decentralized ledger, enable trustless and censorship resistant transactions between participants, and drive value through scarcity.
The Bitcoin network must be highly secure, because if it wasn’t, malicious actors would attempt to alter the ledger and grant themselves more coins than they actually own. They could also try to steal other user’s coins.
With PoW, a single user would need to control 51% of the nodes that secure the network. Achieving this would be monumentally expensive - so costly in fact, that it’s economically unfeasible to even try. As of June 2023, the cost of running a 51% attack is estimated at $1.16 million per hour. Of course, whoever attempted such a thing would also need to spend millions of dollars on the required hardware to stage such an attack. The fact that it would cost more to carry out a 51% attack than any possible financial gains that might be had renders such an exercise pointless.
Another key advantage of PoW is that it helps to drive the value of Bitcoin indirectly. First, PoW enforces Bitcoin’s scarcity by ensuring that the supply is capped at 21 million and making it impossible for coins to be duplicated or double spent. Because there will only ever be 21 million BTC, increased adoption and demand almost inevitably means the value of those coins will increase. In this way, the growth of the Bitcoin network slowly increases its value, incentivizing further growth.
In addition, the need to spend huge amounts of money expending energy to mine Bitcoin also lends value to the network. As miners spend money to verify block data, they earn newly minted BTC as a reward. Because of this, the floor value of BTC maintains an equilibrium with the cost of energy required to mine a new one.
On the downside, PoW has certain disadvantages. The most obvious one is the environmental cost, as Bitcoin expends huge amounts of energy, resulting in an enormous carbon footprint. This narrative has attracted a lot of criticism from politicians, famous personalities like Elon Musk, and crypto entrepreneurs who favor alternative networks.
A second disadvantage of PoW is that its high-energy usage results in slow transactions and expensive fees for network users. Third, there are concerns over the centralization of power in Bitcoin, as select groups of miners control a significant portion of the network.
Exploring the Benefits of Proof-of-Stake
In an effort to avoid the environmental damage and risks of centralization, many newer blockchains, such as Ethereum, Cardano, Cosmos and EOS, have instead adopted the PoS consensus mechanism.
Rather than relying on massive energy consumption, PoS reaches consensus by asking network nodes to risk a significant amount of capital through “staking”, and reward them for honestly validating transactions. Nodes are required to stake a minimum number of coins and will be penalized by losing those coins in the event they act maliciously. By acting correctly, nodes are rewarded similarly to miners, with newly minted coins proportional to the amount of tokens they staked relative to other nodes. In this way, the PoS mechanism ensures consensus is reached securely through a “carrot and stick” approach of financial incentives and the threat of penalties.
Advocates of PoS say it is more efficient and notably “cleaner” than PoW, with the main advantage being that it uses far less energy, resulting in lower costs and barely any environmental impact. PoS also has a lower barrier to entry, as the hardware requirements are much lower for new validators, though admittedly the minimum stake requirement of some chains can be prohibitive. However, the startup costs are low enough that decentralization is improved as more nodes are added to the network.
PoS also scales more easily due to its compatibility with a technique known as “sharding”, where transactions can be offloaded to side chains or layer-2 networks and processed in batches. Due to their scalability, PoS chains offer faster transactions and lower fees for users.
Those are some powerful arguments in favor of PoS, but there is a tradeoff. The biggest weakness of PoS chains is that their security simply isn’t as strong as Bitcoin’s PoW consensus. Theoretically, it is much easier to conduct a 51% attack on PoS chains as it is much easier to obtain 51% of the capital staked on the network than it is to secure a 51% hash rate.
That said, PoS chains do have a way to counter 51% attacks, simply by rolling back the network to the final block just prior to the attack. All transactions made in subsequent blocks would be reversed, making the attack not count. While it’s possible for PoW chains to do the same thing, a rollback wouldn’t do anything from whoever accumulated 51% of the network’s hash rate from cheating again. However, with PoS, the network can simply blacklist the attacker, deleting whatever coins they were staking. Of course, the downside of any rollback would be a massive inconvenience to users who completed honest transactions in the affected block, and subsequent blocks, so such a solution is not ideal.
The Collaborative Potential: Proof-of-Work + Proof-of-Stake
Given the strengths and weaknesses of each model, there has been great interest in exploring the collaborative potential of Bitcoin’s PoW and PoS to achieve even higher security.
The idea is that it should be possible to combine the strengths of both algorithms into a “hybrid PoW/PoS network that involves having both miners who perform complex computations, and validators who stake tokens to provide an additional layer of security and governance. Proponents say that such a hybrid algorithm serves to enhance network security to a level that goes beyond what PoW or PoS alone can provide.
Some of the earliest concepts for a hybrid PoW/PoS consensus mechanism include Dash and Decred.
With these hybrid models, once a PoW miner finds a valid block, it is broadcast to the network in order for the PoS validators to vote on whether to accept or reject it. In this way, the validators act as a check on the miners, improving the security of the network and increasing decentralization.
For all the benefits of hybrid PoW/PoS, neither Dash nor Decred has been particularly successful. While Dash was once a top 20 cryptocurrency by market capitalization, today it barely scrapes into the top 100 tokens on CoinMarketCap.
Rethinking Hybrid PoW/PoS
However, there is one interesting project still looking to tap the benefits of a hybrid consensus mechanism by integrating Bitcoin’s PoW with a PoS system. The Babylon blockchain is a PoS network that adds Bitcoin timestamps to boost its security.
Babylon’s goal is to enhance the security of applications within the Cosmos ecosystem. Cosmos is unique in that, unlike other blockchains that all share the same network, each decentralized application runs its own separate blockchain. To do this, each AppChain requires its own set of validators. This requirement poses a problem for some smaller AppChains, as they can struggle to create an economic incentive to attract validators, thus putting their chain at risk.
Babylon aims to solve this problem by integrating the security of Bitcoin to each AppChains PoS blockchain. The way it works is, it takes the block headers from each Cosmos-based chain that uses its services and writes these into the Bitcoin blockchain. By doing this, it enables anyone to check Bitcoin and confirm that a block was validated there, providing a much greater degree of security that the transaction was verified.
PoS-based slashing mechanisms can be connected to the Bitcoin network via its scripting language, enabling smart contracts to be created that set specific spending conditions. Babylon then employs advanced cryptography to translate the PoS chain's slashing condition into a spendable transaction on Bitcoin. Through this method, Babylon creates a BTC staking protocol that makes it possible for Bitcoin to secure its network without altering or forking its blockchain. Therefore, it also gives BTC holders a way to stake and earn rewards for contributing to the security of the PoS chain.
Babylon uses Bitcoin due to its reputation as one of the most secure blockchains of all, and in this way helps to augment the PoS-based security of Cosmos chains. While Bitcoin’s slower transaction speeds might be seen as a disadvantage, the additional security Babylon provides can help to reassure users involved in larger transactions.
A second benefit of Babylon’s unique system is that Cosmos AppChain can save money that would otherwise be spent on boosting network security through incentives. Babylon, meanwhile, secures its own chain using a PoS mechanism with validators, who get paid both in Babylon’s native token and the tokens of each chain that’s using the service.
Closing Thoughts
Hybrid PoW/PoS systems can significantly increase the cost of attacking blockchain networks because they require malicious actors to hijack two distinct systems in order to gain overall control.
By tapping into Bitcoin’s existing PoW mechanism, a blockchain network can benefit from Bitcoin’s high level of security without expending any additional energy of its own. As a result, such blockchain’s become more sustainable, as they do not need to devote additional power to the Bitcoin network itself.
Of course, different blockchains have different use cases, and some will always opt for the enhanced security of PoW while others will prize the benefits of PoS. But for those blockchains that either require greater scalability, or cannot provide enough incentive to secure themselves alone, there is a lot of potential in the idea of going hybrid.
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